N.Y. Fed: Profits at Big U.S. Banks Soar Since Crisis

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Federal Reserve Bank of New York
David Karp/AP
By Richard Leong

NEW YORK -- Profits have soared since the global financial crisis at the five biggest U.S. banks with market-making dealing operations, New York Federal Reserve economists said in an article released Wednesday.

From 2009 to 2014, the combined net income of JPMorgan (JPM), Citigroup (C), Bank of America (BAC), Goldman Sachs (GS) and Morgan Stanley (MS) annually averaged $41.73 billion, up from annual average of $25.08 billion from 2002 to 2008, they said.

%VIRTUAL-pullquote-These trading revenue and income figures suggest that dealers continue to play a key role in liquidity provision.%Helping boost profits were trading revenues that they and other dealers have seen returning to the levels before the financial crisis seven years ago, the article said.

"These trading revenue and income figures suggest that dealers continue to play a key role in liquidity provision," New York Fed economists Tobias Adrian, Michael Fleming, Or Shachar, Daniel Stackman and Erik Vogt wrote in their blog titled "Changes in the Returns to Market Making."

The study comes amid warnings by some industry analysts that tighter banking regulations, including higher capital requirements, have significantly cut back dealers' market-making activities. They argue this has reduced liquidity and contributed to "flash" events including the one seen nearly a year ago in the Treasuries market.

But in their article Wednesday, the New York Fed economists said: "We show estimated returns to market making to be at historically low levels -- a finding that seems inconsistent with market analysts' argument that higher capital requirements have reduced market liquidity."

Market makers seek to ensure orderly trading of stocks and bonds. They usually draw on an inventory of securities to provide liquidity when needed.

Wednesday's article is a fourth in a second series from the New York Fed that examines changes in market liquidity in the stock and bond markets.

The previous blogs in this series have said the stock, Treasuries and corporate bond markets remain highly liquid, although liquidity risk in equities and U.S. government bonds seems "elevated."

New York Fed economists in these articles attributed the rise in liquidity risk in stocks and Treasuries as more likely coming from increased competition from high-frequency trading firms and hedge funds rather than tougher regulations.

The five big banks cited in the study are expected to release their quarterly results beginning next week.

The New York Fed economists said these banks' annual income was also more stable than pre-crisis levels, they added.

The banks' "Sharpe ratio" on their income rose to 2.28 from 1.23, suggesting milder swings in their annual earnings since the global credit crunch, they noted.
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